The indecent inconsistency of the neo-liberals

Last weekend, the Australian government announced a major new funding initiative for farmers. The so-called – Farm Finance Program – will handout millions to farmers who are struggling to make ends meet. Whenever I see these special assistance packages being handed out to the rural sector, which is politically well-organised, I reflect on the plight of the unemployed. With unemployment rising in Australia as the economy goes into reverse on the back of failing private demand and deliberately imposed fiscal cutbacks, the decision to hand out economic largesse to the farmers wreaks of inconsistency. The unemployed have diminishing chances of getting a job at present and the income support provided by government is well below the poverty line. That poverty gap is increasing and the Government refuses to increase the benefit claiming fiscal incapacity. They also say they are jobs focused, despite employment growth being flat. The comparison of the vastly different way the government treats farmers relative to unemployed highlights, once again, that the way we construct a problem significantly affects the way we seek to solve it. The neo-liberal era has intensified these inconsistencies which have undermined the capacity of public policy to achieve its purpose – to improve the welfare of the citizens. The research question is: Why do we tolerate such inconsistent ways of thinking about policy problems and their solutions?

The complete suite of Fantasy Budget blogs are as follows:

• The indecent inconsistency of the neo-liberals
• Australia output gap – not close to full capacity
• Daily macroeconomic income losses from unemployment
• The Australian labour market – 815 thousand jobs from full employment
• What is a Job Guarantee?
• Investing in a Job Guarantee – how much?
• MMT Budgetary Principles
• The Fantasy Budget 2013-14

By way of background, the next few blogs this week will form part of a “Fantasy Budget 2013-14” that I am preparing. A major media organisation invited me to join a few economists to prepare our own alternative budgets. The Federal government brings down their 2013-14 budget on May 14, 2013. In my budget you will see major increases in the budget deficit, a massive cut in corporate welfare, boosts to a range of public infrastructure programs (schools, universities, health), major investments in renewable energy, and a little job creation program called the Job Guarantee. I will be unfolding background research to this over the next few days.

First, lets update our understanding of what is happening to income support payments to the unemployed in Australia. This is important because it frames the way the Government chooses to segment the population by political relevance or weight, rather than one’s intrinsic rights as a citizen.

Unemployed in Australia forced by government to live below the poverty line

For overseas readers here is some background. Unlike the unemployment compensation insurance schemes that operate in most countries, the Australian unemployment benefits system is paid by the federal government at set rates for an indefinite period (subject to Work Activity tests). Employers and employees do not contribute to the scheme and everyone gets the same rate (adjusted for marital and parental status).

In the May 2009 Budget, the Federal government increased pensions for all groups except the unemployed and single-parents. For example, single pensioners (other than the excluded categories) received about $50 a week more and married couples around $12 which represents a major realignment with average weekly earnings.

There is no doubt that the 2009 aged pension increases were necessary given how stingy the previous conservative government was to this group.

But given that the economic crisis has impacted mostly on the unemployed and the Government’s own austerity program is now causing unemployment to rise sharply again, how can the government justify not increasing the unemployment benefits as well?

I have previously considered the state of poverty among the unemployed in these blogs – Why are we so mean to the unemployed? and The plight of the unemployed – under growth and decay and Our pathological meanness to the unemployed is just bad economics.

I last considered this issue in August 2012 and wrote this blog – Fat cat bankster wants to make the unemployed even more desperate.

Things have deteriorated since then.

The background is that there has been a widespread call from a diversity of interests in Australia demanding the Government increase the income support for the unemployed.

On June 26, 2012 the Australian Senate (our upper house in Federal Parliament – the “states house”) commenced an The adequacy of the allowance payment system (long-name is The adequacy of the allowance payment system for jobseekers and others, the appropriateness of the allowance payment system as a support into work and the impact of the changing nature of the labour market).

The Committee reported back on November 29, 2012 – Full Report – but failed to deal with the problem adequately.

It was little wonder given the Australian Government’s own – Submission to the Senate Inquiry on the adequacy of the allowance payment system for job seekers and others.

The Government’s Submission sets the scene for its argument by saying that:

… the fundamentals of the Australian economy continue to be strong and the outlook remains positive … Prospects continue to be underpinned by strong growth in our regional trading partners and an unprecedented pipeline of mining investment …

It is crucial to enhance the employment prospects of job seekers, including those on allowances. This is achieved by arrangements which ensure that the design of allowances, supplementary payments to recipients, employment and skills development programs and strategies to support productivity work in concert to increase employment opportunities and actively encourage and support recipients of allowances to transition to work.

Since then, the economy has slowed and the unemployment has risen sharply with employment growth is flat. While the Government refuses to encounter direct public sector job creation it is forcing the rising number of unemployed to live on below poverty line incomes.

The Government’s Submission rejects that argument. They say in relation to calls to increase the unemployment benefit to bring it back closer to the poverty line that:

Any increase of this nature would have a substantial fiscal cost which would need to be balanced against other government spending priorities and fiscal objectives. In addition, an increase would not assist in maintaining the fundamental character of Newstart Allowance as a payment that predominantly supports work re-engagement. As the OECD acknowledges, an increase in the base rate of Newstart Allowance has the distinct disadvantage of reducing employment incentives, especially for those who can only obtain low paying employment.

Aside from the work disincentive effect associated with options that involve lifting base allowances by a significant amount, it may not be necessary, as around 60 per cent of recipients have left Newstart Allowance within 12 months of commencement on the payment. Given this, an increase in the base rate is arguably a very costly option for this group. Reforms which support productivity and participation continue to be a policy priority. In a climate of fiscal constraint, it remains important to consider expenditures on income support alongside other public expenditure priorities and to note that the position of people out of work is also assisted through investment in taxation measures, employment services and broader social policy and program reforms.

This is what the OECD actually said on the matter. In the – OECD Economic Survey, Australia 2010 (see an overview of the Survey HERE) the OECD said that:

The transfer system could better tackle poverty, while strengthening incentives to work … additional attention given to disadvantaged groups should not lead to worsening of services provided to less disadvantaged unemployed. Over time, the adequacy of Newstart Allowance should be examined, taking into account both fiscal constraints and community expectations. An option would be to increase the Newstart Allowance for the initial period of unemployment to provide a more adequate safety net, but job search requirements should be maintained and the impact on the incentive to work should be assessed.

That is quite different from the spin the Government has put on it in its official Submission to the Senate Inquiry.

Clearly, the OECD was playing up to its usual tricks by and large in claiming that there are fiscal constraints on providing adequate income support to the unemployed. There reality is that there are no fiscal constraints on the Australian government increasing the unemployment benefit (Newstart Allowance).

The only issues relate to equity (and this group is living in poverty as a result of mean-spirited government policy) and the risk of inflation (will the rises blow out nominal aggregate demand growth?).

If the answer to the second question is yes and the first is that more equity is required then a combination of unemployment benefit increase and rising taxes on higher income earners would be indicated. In fact, there is no inflation threat that would arise from restoring some relative equity between income support recipients and this would require a significant increase in the unemployment rate.

The Australian Government could increase the unemployment benefit with the stroke of a computer keyboard. It issues the currency after all. Even if the computer keyboard operator fumbled and put an extra zero on the end of the new benefit there would be no financial constraints on the payment being honoured.

But the point here is that even the OECD can see that the unemployment benefit has become a joke in Australia as successive governments (conservative and so-called progressive) have allowed the levels to lag behind income movements elsewhere in the economy (including the aged pension).

The reference in the Government’s Submission to the “effectiveness of the payment system as an incentive into work” and that the Newstart Allowance (the unemployment benefit) is “meeting its fundamental and longstanding purpose as a transitional payment, designed to incentivise work engagement” is one of those classic reinventions of history.

The fact is that the unemployment benefit was fundamentally designed to provide income support for those who fell into unemployment in an environment where long-term unemployment was rare (and defined as 12 weeks or more rather than 52 weeks or more as it is now) and the nation enjoyed true full employment.

At that time, spells of unemployment were short and most people could quickly find a new job if they were unlucky enough to become unemployed. Unfilled vacancies were usually above the level of unemployment which meant that firms were always looking for workers and provided training slots with job offers to ensure they could fill vacancies.

Unemployment benefits were designed to be short-term income support in an economy where the national government took responsibility for ensuring there were always enough jobs available to match the preferences of the available labour force.

The incentivise narrative entered much later as the neo-liberals were looking for victims to blame for the mess that their austerity policies were creating – that is, the high unemployment that they created by abandoning active fiscal policy and relying monetary policy to use unemployment as a policy tool to keep inflation low.

It was introduced when unemployment to vacancy ratios rose – sometimes to around 10 to 1 – currently around 4.5 and that is not counting the mass underemployment that is a more recent manifestation of the failure of the economy to produce enough jobs.

It was obvious the economy was not producing enough jobs yet to disguise that a full-blown attack began on the unemployed and the narrative shifted to claims their allowances were too high and were undermining incentives to work.

Quite simply, it was argued that our disadvantaged citizens preferred the pittance that the government provided them by way of unemployment benefits to working despite the fact that the former life opened the person to public humiliation, vilification from the media and civic leaders, and – poverty.

Somehow, successive governments were able to convince us that these characters were lazy and living high on the hog and should be working like us. The argument relied on a sort of collective denial or ignorance of the reality – the data – the UV ratio, the lack of jobs – whatever you want to call it.

When those arguments were raised, relevant Government Ministers would perjure themselves with creative stories such as “there are plenty of jobs it is just that the firms have stopped advertising them because they know the dole bludgers won’t take them anyway”.

When it was pointed out that such a scenario would imply the firms all had long order books and the evidence didn’t support that – the relevant person would resort to vilification and suggest university academic were socialists or worse.

All the calculations that follow are taken from the following data sources:

• Historical data for benefits at – Single Persons – and Married Persons.
• RBA data for – Consumer Price Index – Table G2.
• RBA data for – Labour Costs – Table G6 – to compute Average Weekly Earnings.
• Poverty line data is available on a quarterly basis from the – Melbourne Institute of Applied Economic and Social Research

Here is the update. The Newstart Allowance is adjusted every March and September.

The following graph shows the evolution of the Single Unemployment Benefit and the Single Unemployed Poverty Line since 1973 until March-quarter 2013.

The single unemployment benefit stands at $35.50 a day which is well below any reasonable estimate of the poverty line in Australia (for singles at $A64.10 per day). For married couples the unemployment benefit is currently at $56.47 per day, while the corresponding poverty line is set at $79.99 per day.

Whether one is single or in a couple, once accommodation is paid for, there is not very much left of the unemployment benefit income.

The next graph shows the weekly unemployment benefit for married couples and the corresponding poverty line. The interesting feature is that the deterioration in the situation for married couples came when the conservatives were elected in 1996. The current Labor government (elected in 2007) allowed the deterioration to continue.

The next graph shows real average weekly earnings and the real single and married unemployment benefit indexed to 100 in the December-quarter 2007. This quarter was the peak of the last cycle. The real single and married index have moved together since that time.

I should note that productivity has been rising well above the rate of real average weekly earnings since the early 1980s so there has been a massive redistribution of national income away from workers generally over the last 30 years to profits.

But even with that dynamic unfolding, real average weekly earnings have grown modestly since the early 1980s whereas the real standard of living for the unemployed has barely changed.

Since December 2007, real average weekly earnings have grown by 9 per cent, which is pitiful. Real unemployment benefits have not improved at all. So the Government has deprived the unemployed of enjoying some of the benefits of national productivity gains.

Sure enough the unemployed haven’t done the work. But the Government’s fiscal policy stance has deliberately locked them out of employment.

But when the farmers are involved – there is plenty of government support

The document – Farm Finance – Concessional loans for farm businesses – provides more detail on the program.

The Government claims it is “providing funds for concessional loans” because

Significant debt pressure can restrict growth and hinder farmers from improving their business practices. Concessional loans can not only offer much-needed assistance to farm businesses in the short-term, but can also improve their financial capabilities into the future.

Concessional loans give farmers the breathing space to focus on growing and improving their farm business, including risk management practices and preparedness measures, as well as looking at opportunities to improve their business structures.

Concessional loans will only be made available to viable farm businesses. Loan recipients will need to demonstrate financial need, participate in a farm business planning exercise, and demonstrate their capacity to meet a debt repayment schedule.

There are a a bevy of assistance packages for farmers.

This document from Centrelink (a Government agency) – Assistance for farmers – says:

There are occasions when you may experience exceptional circumstances that are beyond your control, such as a severe drought. You may be eligible to receive the Exceptional Circumstances Relief Payment (ECRP).

The quantum of the ECRP is “the same rate as the Newstart Allowance” and the farmer qualifies “for a Health Care Card” (that is, subsidised health care).

Farmers also enjoy a “$20,000 off-farm salary and wages exemption”, which is not available to Newstart recipients.

Then the document says:

Note: you do not have to satisfy an Activity Test. The payment is a grant, not a loan, and you do not have to put your farm on the market.

So the farmers who are unable to earn an income get income support but not reciprocal obligation (to use the neo-liberal terminology) that is forced onto an unemployed person via the Activity Tests.

This document – Activity test and participation requirements – from the National Welfare Rights Network demonstrates how pernicious these tests are.

There are a host of other – Rural Income Support – programs that supplement the ECRP depending on circumstances.

These include the Transitional Farm Family Payment – the Farm Management Deposits Scheme – Tax Relief – Rural Financial Counselling – to name a few.

You can learn more about assistance to farmers – HERE

The latest scheme – the Farm Finance program – adds to the list.

The Government claims it is important because the high Australian dollar and rising production costs are undermining farm viability. The scheme will run for 2 years and a farmer can get up to $A650,000 at low interest rates.

The program will provide financial planning and tax relief for farmers.

Interestingly, the program will help farmers who are unviable at present. But a farmer with no (or insufficient) income is not considered to be unemployed.

Construction matters!

What is the difference between an urban/rural worker (say) who loses his/her income because their job (productive activity) vanishes and a farmer who loses his/her income because their job (productive activity) vanishes as a result of changing global or national economic circumstances?

Why is one job loser able to access crisis relief (which is generous) and the other job loser only able to access unemployment benefits which now provide below-poverty line income support in Australia?

Why is an unemployed worker not able to access concessional loans on their property to help them through the crisis, when clearly their plight is beyond their control?

It was obvious that both climate change and the changing external environment (exchange rates and the mining sector) were going to undermine the viability of current farming practices.

Why have we ignored all the developments in alternative farming (permaculture, natural sequence farming, organic and bio-farming) up unto now? Construction matters!

We have a long history of seeing the farmer as the entity to be protected and the unemployed person as the entity to be vilified.

For example, regularly, through a variety of media, distressing stories of the drought’s impact are retold in different ways. We are very much aware of the stress the drought imposes on farming families and their regional and rural communities. We are aware of the damage to export income and of the fragile, fractured nature of rural life.

We respond by instinctively looking to the heavens, realising that the drought is caused by a lack of rain.

In constructing the problem as a system failure we engender public sympathy for those at the mercy of the weather and demand that the Government provide financial support to the farmers. The amount of aid that we allow to be given to farmers (via our continued voting for governments that give it) is huge and largely unconditional.

However, we could have constructed the problem in a different way. There is evidence that sustainable agricultural practices can cultivate drought-resistant farms, even in areas where conventional farms have suffered badly. Should we therefore focus on the “deficiencies” of individual farmers? Should we highlight their lack of skill or poor motivation or reluctance to plan for bad seasons?

While poor farming practices will deepen the impact of the drought, the root cause of the problem – given current practices – is clear – not enough rain is not enough rain!

Improving farming practices must be part of any long-term strategy to promote ecological sustainability. There is ample evidence from the the permaculture, natural farming, organic agriculture literatures that drought avoidance is possible if new techniques are learned.

But our immediate reaction is to construct the lost farm income problem as one right of the (climatic) system failing our rural communities and thus engendering our support.

How else might we think about drought and the powerlessness of individuals when systems fail? What about a drought of jobs?

My own work shows that Australia loses millions of dollars in lost national income per day through our willingness to tolerate persistently high rates of unemployment and underemployment.

The scale of loss in income arising from unemployment (and underemployment) dwarfs the losses arising from drought or problems caused by exchange rate movements. That is not an opinion – it is a fact – easily documented.

But when was the last time you read about the costs of unemployment or the plight of the unemployed? Even in the current crisis, there is more emphasis on the financial market than there is on the labour market.

There have been more feature stories about failed entrepreneurs having to bear hardship than stories about the unemployed worker who loses everything.

How many times do you hear our parliamentarians or the central bank officials or treasury heads expressing an urgent concern about the “unemployment problem” and advancing direct policies to generate jobs for all who are willing and able to work?

The costly acceptance of the status quo raises the following question for all of us. Why do we always have such an urgent concern about farm problems – which are smaller in income lost and affect families and children – yet adopt such indifference to the unemployed?

The answer lies in how we construct the problem. We have been repeatedly told that unemployment is the fault of the unemployed. The solution then focuses on making the unemployed “employable” rather than on ensuring there are sufficient jobs. We arraign our most disadvantaged citizens with accusations that they are lazy and unskilled claiming that they could get work if they tried harder or changed their attitude.

Meanwhile, we blithely ignore the failure of macroeconomic policy to ensure there are enough jobs available despite the evidence for unemployment as a “system failure” being as compelling as meteorological data, for example, showing a lack of rain.

The current crisis is bringing home again the powerlessness of individuals to improve their circumstances when there is a massive aggregate demand failure which imposes a job ration on the labour market.

The exchange rate strength may be impacting harshly on a range of exporting industries that are not simultaneously enjoying high international demand for their output. That is one of the facts of life that come with a flexible exchange rate.

But unemployed workers who worked in these industries are left in poverty when the bosses are being rewarded with massively discounted and generous loans.

It is clearly easy to deal with unemployment if there is a political will – just create jobs. If the private sector will not create enough jobs then there is only one sector left – the public sector.

There is no retraining or change of technique required. This is why I argue that we should, as a matter of urgency, implement a Job Guarantee to ensure there are enough jobs at all times irrespective of the swings in aggregate demand.

The JG would be act as a highly sophisticated automatic stabiliser and reduce the damaging manifestations of macro system failure.

The doomsayers will say this is another “painting rocks” suggestion. However, there are numerous environmental and social needs in our communities that are unmet and that will never be met by the private sector.

What is also overlooked is that the unemployed are already in the “in the public sector” being (barely) supported on welfare and not making a productive contribution to society.

It would be better for government to provide the unemployed with opportunities to contribute to productive output, to contribute to their communities, and to acquire independence than to sign welfare cheques, police activity tests, and recycle those without work through a succession of programs and placements.

However, when it comes to the problems that farmers face over the cycle – we always start with the proposition that they need more government handouts.

The long-term solution to that farming problem requires more fundamental shifts in land and water use and will require extensive retraining of farmers, many of whom will resist this and bring political force to bear to maintain their privilege access to government assistance.

The Farm Finance decision once again displays the inconsistency of this Government.

The same government bowed into the rural lobby – when they caved in and refused to ban the horrendous live export trade after evidence that our livestock was being subjected to unthinkable cruelty.

On May 30th, 2011, the ABC Four Corners program (which is one of the best investigative units around) aired the program – A Bloody Business – which presented “an explosive expose of the cruelty inflicted on Australian cattle exported to the slaughterhouses of Indonesia”.

The entire industry should be closed down – but then don’t ask me I am a vegetarian!

And this is a government though that is content to lock innocent refugees up in harsh tropical prisons with their young children knowing that there is a wealth of research evidence now showing us that the interned suffer dramatic psychological damage. Their children are scarred for life.

Why are these people locked up? Because they had the audacity to escape from countries that the Australian government, in concert with other martial nations, chose to invade (in the name of liberation).

See – ‘Ashamed to be Australian’: doctor slams Manus Island centre – for a recent discussion.

The Government’s motives are purely political. The most venal instincts in the electorate have been whipped up by right-wing, xenophobic shock jocks and print journalists about the impending invasion should we allow these “boat people” access to our shores. Tens of thousands come in via our airports on visitor visa and overstay whereas a few hundred come in a year by boat. The latter are then locked up on remote islands.

One rule for some, and another for others – depending on political clout and party funding potential.

Conclusion:

Whenever we think about a policy problem there are many constructions that are possible. The way we construct the problem is often driven by the dominant ideology which probably caused the problem in the first place and has no real stake in actually solving the problem at its elemental level.

So we get a version of the problem – the unemployed are lazy – and attack the individual with an elaborate labyrinth of policies that do nothing at all to get the workers into jobs.

The same goes for how we understand Modern Monetary Theory (MMT) and so we get sidetracked into a number of dead-ends because the debate is falsely constructed.

That is enough for today!

(c) Copyright 2013 Bill Mitchell. All Rights Reserved.